The Tax Implications of Selling Your Veterinary Practice

After years of building your veterinary practice into a successful, thriving business, you’re now at a point where you’re considering selling. Congratulations!

Selling your veterinary practice that generates over $2 million in annual revenue offers a significant financial incentive for you to retire, start a new venture, or pursue a different path. However, before you get too excited about the proceeds, it’s important to understand the tax implications of such a sale. The financial rewards are substantial, but they come with tax responsibilities that need to be considered carefully.

While the idea of selling your practice might feel like a well-earned reward for your hard work, understanding the tax impact of selling a veterinary clinic is key to ensuring you don’t lose more than you expect when it comes time to pay taxes.

Understanding the Tax Impact of Selling a Veterinary Clinic

When it comes to taxes on the sale of your veterinary practice, there are several factors that will affect how much you end up owing to the IRS. The tax implications can vary significantly based on how the sale is structured (asset sale vs. stock or equity sale) and your business’s financial health. For practices generating over $2 million in annual revenue, the tax burden can be substantial, so it’s essential to have a solid understanding of what to expect.

Capital Gains Tax

The majority of proceeds from when you sell your veterinary practice are taxed as capital gains rather than ordinary income. Long-term capital gains rates (which are lower than ordinary income rates) typically apply if you’ve owned your practice for more than a year. Long-term capital gains tax rates can range from 0% to 20%, depending on your income level. 

Allocation of Sale Price

How the purchase price is allocated between tangible assets (like equipment) and intangible assets (like goodwill) affects your tax outcome. More allocated to goodwill usually favors lower tax rates for you as the seller.

Real Estate Considerations

If you own the building, selling it separately or leasing it to the buyer has its own tax consequences. Rental income (if you retain the property and lease it) is taxed differently from the sale of a building.

Earn-Outs and Deferred Payments

If part of your payment is contingent (like an earn-out based on future performance), taxes on that part might be deferred until payments are actually received.

Retirement Contributions

Selling the practice can create a big income spike in the year of sale, so pre-sale tax planning might include maxing out retirement contributions to reduce taxable income.

State Taxes

In addition to federal taxes, you’ll also need to consider state taxes. Some states impose their own capital gains taxes, which can further increase your tax burden. The rates and rules vary depending on your state, so it’s a good idea to consult a tax professional who understands your local tax laws.

Know Where You Stand Before Selling

Selling a veterinary practice that generates significant revenue can be a lucrative step towards your next phase in life. However, understanding the tax implications is critical to ensure you retain as much of the sale proceeds as possible. While navigating these implications can be overwhelming, a vet practice sales advisor can help you structure the sale in a way that minimizes tax liabilities and ensures you’re making the most of the financial opportunity. They can also connect you with tax professionals who specialize in practice sales, ensuring all aspects of the transaction are handled correctly.

At Transitions Elite, we work with you to assess your practice’s value, determine the best sale structure, and coordinate with tax experts to plan for any tax liabilities. Our expertise can provide peace of mind as you navigate the complexities of selling your practice and managing your tax obligations.